Mixed Picture

05/11/2010 at 10:46 am 2 comments

It’s been another interesting week in these most interesting of times. The Fed’s decision to purchase another $600bn worth of US bonds did not come as a surprise, but it moved markets nonetheless. Equities did best, though bonds also performed well: after all, it is the bond market that is directly affected by the QE fairy dust. The big loser was the dollar, though as its weakness has been underpinning US export growth of 15-20% p.a. of late against a backdrop of near-zero inflation it seems unlikely that this will trouble American policymakers overmuch.

Perhaps a little less high profile were Angela Merkel’s renewed efforts to secure a debt restructuring for the peripheral eurozone countries and so reduce the burden of bailing them out that has fallen on German taxpayers. But her concern should remind us that the developed world continues to enjoy decidedly mixed fortunes at present.

For there are bonds and bonds, and while US Treasuries and German Bunds have risen over the last couple of weeks on the QE story, not every country’s debt has followed suit.

The yield of 10 year US and German bonds has fallen by 0.08% since two weeks ago. 10 year Greek bonds, however, yield almost 2% more, and 10 year Irish bonds about 1.1% more, which has pushed their spread over German paper to a new record (5.3%). Similarly, 10 year Spanish government bonds have risen 0.4% to a spread of more than 2% over Germany, and Portuguese bonds about 1% to a spread of 4.2%.

This compares to unchanged yields both for the safe eurozone countries such as France and the eurozone’s seemingly safe (but lower rated) eastern neighbours, such as Russia and Poland.

Nobody serious believes that financial markets are perfectly efficient any more. But investors ignore messages like these price movements at their peril. It was only at the end of June – a mere four months ago – that equity markets found themselves nursing significant quarterly losses, in large part due to the threatened sovereign debt collapse in Greece. Despite the fact that the credit ratings of countries such as Ireland and Spain remain relatively high, the bond market is telling us on its fringes that the PIGS could well have another sting in their tail.

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Growth Spurt It Couldn’t Happen Here


  • […] recent travails of the more heavily indebted sovereign borrowers (to which readers of this blog were alerted some time ago). In the spirit of the royal engagement, we would rather focus on some good news […]

  • […] in the widening of the spread of Portuguese government debt over that of Germany. (Similar moves preceded the Irish bailout last November.) In fact, ten year Portuguese paper yields 4.3% more than Germany’s at time of writing […]

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